How Working in Retirement Affects Your Social Security Benefit

If you work and claim Social Security benefits at the same time, part or all of your payments could be temporarily withheld. Here's a look at how working in retirement could affect your Social Security payments:

Factor in your age. If you are full retirement age or older, continued earnings from employment generally have no affect on your Social Security payments. The full retirement age is 66 for people born between 1943 and 1954, and it gradually increases in two-month increments until reaching 67 for people born in 1960 or later.

Annual earnings limit. If you are younger than full retirement age during all of 2013, you can earn up to $15,120 without it affecting your Social Security benefit. After that, $1 will be deducted from your Social Security benefit for each $2 you earn above the limit. For example, if you sign up for Social Security benefits worth $600 per month ($7,200 for the year) and earn $20,800 ($5,680 above the $15,120 limit), the Social Security Administration would withhold $2,840 of your benefit. "For people who did file at 62 and regret the decision, the way to make up for that is to, if possible, go back to work and have your benefit withheld," says Elaine Floyd, director of retirement and life planning at Horsesmouth. "If you work and if your benefit is withheld, it will be recalculated at full retirement age to give you back the reduction that was deducted."

In the year you turn your full retirement age, the earnings limit climbs to $40,080, after which $1 is deducted from your payment for every $3 you earn above the limit. And the earnings limit no longer applies once you reach the month you turn your full retirement age. For example, a retiree eligible for $600 monthly Social Security payments who will turn 66 in November 2013 and earns $41,580 between January and October would have $500 withheld from his checks. "Social Security will adjust your benefits upward at your full retirement age to account for months that you didn't receive a check, but you may not get what you are expecting in the short term if you are impacted by the earnings test," says Joe Elsasser, a certified financial planner for Sequent Planning in Omaha, Neb., and developer of the software program Social Security Timing.

Monthly earnings limit. Sometimes people who retire mid-year have already earned more than the annual earnings limit. In this case, there is a one-year exception to the annual earnings limit, and it is replaced with a monthly earnings limit. People who recently retired can earn up to the monthly earnings limit of $1,260 per month in 2013, and still receive Social Security payments even if their earnings exceed the annual earnings limit. For example, a man earns $45,000 in 2013 before retiring at age 62 at the end of October 2013. He then takes a part-time job earning $500 per month, so he will receive Social Security payments in November and December because his earnings in those months are less than $1,260. If he earns more than $1,260 in November or December, he will not receive a benefit for that month. And beginning in 2014, the annual earnings limits will apply to him.

What counts as earnings. Your wages and earnings from self-employment count toward Social Security's earnings limit. Sources of income that don't count toward the earnings limit include government benefits, investment earnings, interest, pensions, annuities and capital gains.

Benefits are not permanently withheld. If some or all of your Social Security payments are withheld because you exceeded the earnings limit, your benefit will be recalculated at your full retirement age to give you credit for the withheld benefits. "In general, working as long as possible is a good idea," says Laurence Kotlikoff, an economist at Boston University and president of Economic Security Planning, Inc. "One can potentially dramatically raise one's benefits via the recomputation of benefits provision."

For example, if you claim a Social Security benefit of $750 per month at age 62 in 2013, but then earn enough between ages 62 and 66 that all of your payments in those years are withheld, your payments would be boosted to $1,000 a month at age 66 to make up for the withheld payments. "If he's single and never been married and takes benefits early, the benefits he loses via Social Security's earnings test will be made up to him in the form of permanently higher benefits starting at full retirement age," says Kotlikoff. "But for such a person, the best strategy is likely to be to wait until 70 to collect." Also, if your latest year of earnings turns out to be one of your 35 highest-earning years in the workforce, your benefit will be recalculated to pay you for your higher earnings.